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Applicability of POCM 6.3 During the year, the development partner of the appellant, EMAAR MGF. received an amount of Rs. 45.07,64,461 on account of sale of villa plots. However. no revenue was recognised by it or the appellant, whose share as per the development agreement dated 03.11.2006 was 25% out of the gross receipt by citing the percentage of completion method (POCM).

6.4 It is undisputed that the appellant and its development partner, EMAAR MGF. both, are developers, and not contractors. It is also noted that AS-7 cannot be applied in case of real estate developers as AS-7 is applicable only in respect of construction contractor wherein the estimated cost of project can be estimated with reasonable certainty even Emaar Hills Township Private Limited, Hyderabad at the start of construction. Also, in such cases, revenue of the construction is also predetermined at the very start of the construction activity. On the other hand, in the case of real estate developer, both these components cannot be determined till the unit is ultimately sold to the customer.

6.6 Considering the above, the reliance of the appellant over applicability of POCM is rather misplaced.

6.7 While the appellant has been relying on applicability of POCM for not offering the income for taxation, it is noted that in the Statement of Facts filed along with Form no. 35 while filing this appeal, the appellant had following to say as regards the policy of revenue recognition being followed by it:

A. Real Estate Projects (1) Revenue is recognized, in relation to the sold area only, upon transfer of all significant risks and rewards of ownership of such property as per the terms of the contract entered into with the buyers, which generally coincides with firming up of the buyers' agreement, on the basis of percentage of completion as and when all of the following conditions are met:

21. In light of the above factual position and arguments advanced by the learned counsel for the assessee and the revenue, the sole issue that came up for our consideration is, whether the amount received by the appellant and its developing partner, Emaar MGF, for sale of villa plots is a taxable receipt for the financial year concerned, or it is only an advance pending recognition of revenue, as per the accounting standards, etc. If it is taxable receipt, then how much ought to be brought to tax in the hands of the appellant for the year under consideration. The Emaar Hills Township Private Limited, Hyderabad appellant, right from the beginning, argued that it has followed Percentage of Completion of Method (PoCM) as per Accounting Standard - 7 for revenue recognition for the development of the project and based on percentage of completion method and taking into account the advances received from customers, the revenue has been recognized. In fact, the appellant has followed PoCM method for recognizing the revenue from sale of apartments/ villas, and the same has been accepted by the Assessing Officer. The appellant had also followed PoCM method for recognizing the revenue in respect of sale of villa plots, but the Assessing Officer did not accept the method followed by the assessee and assessed the entire advances received from customers for sale of villa plots by Emaar MGF, as income of the assessee. Therefore, to decide whether it is an advance, as claimed by the assessee, or income, as assessed by the Assessing Officer, it is necessary to examine the applicability of PoCM method and relevant accounting standards, AS-7 and AS-9,- issued by ICAI. Accounting Standard

- 7 deals with recognition of revenue from construction contracts and it allowed both Percentage of Completion Method (PoCM) and Project Completion Method (PCM) for revenue recognition in construction contracts. The method of revenue recognition for real estate developers, whether to follow Percentage of Completion Method or Project Completion Method, with significant accounting and far reaching tax implications, the ICAI has also issued a Guidance Note on accounting for real estate transactions and as per the said Guidance Note which suggested application of POCM for all real estate transactions, irrespective of whether the Emaar Hills Township Private Limited, Hyderabad duration of such projects is beyond 12 months and the project commencement and project completion date fall into different accounting periods. This method is applied when the outcome of a real estate project can be estimated reliably, and when total project revenue can be estimated reliably, and further it is probable that the economic benefits associated with the project will flow to the enterprise. The Guidance Note also specifies the timing of the revenue recognition and as per the said Guidance Note, when the stage of completion of a project reaches a reasonable level of development, revenue needs to be recognized. A reasonable level of development is not achieved if the expenditure incurred on construction and development costs is less than 25% of the total construction and development cost of the project. Further, at least 25% of the saleable project area is secured by contracts or agreements with buyers. Further, at least 10% of the total revenue, as per the agreement of sale or any other legally enforceable documents are realized at the reporting date in respect of each of the contracts. If the above 3 conditions are satisfied, then the percentage of completion method can be followed for revenue recognition. Further, there is another school of thought as per which for real estate projects, Project Completion Method is also suitable where the project involves short term, straightforward transactions, revenue recognition upon transfer of significant risks and rewards and further, the control of the plot typically transfers at the point of sale.